The Queen's banker, Coutts, has been hit with a record fine for failing to
monitor whether money it was handling was the proceeds of crime.

The Royal Bank of Scotland subsidiary was fined £8.75m by the Financial Services Authority - a record amount for a money laundering offence.

The fine could be followed by up to four more penalties for other banks referred to the FSA's enforcement division for similar offences.

The City watchdog found Coutts had failed to carry out correct checks on "politically exposed persons", wealthy foreign politicians and their families often from troubled countries such as Libya.

The failures extended to due diligence on new clients and regular checks on existing ones not being carried out satisfactorily.

Tracey McDermott, acting director of financial crime at the FSA, said: "Coutts' failings were significant, widespread and unacceptable. Its conduct fell well below the standards we expect and the size of the financial penalty demonstrates how seriously we view its failures."

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Coutts had up to 1,200 high risk customers during the three-year period reviewed - defined as customers whose assets come from countries that have lack money laundering controls. Many of the customers were also personal equity plans.

The penalty comes just five months after Coutts was fined £6m for mis-selling AIG saving products. It is also the sixth-largest ever imposed by the FSA.

Of 103 high-risk customer files reviewed by the FSA 73 were found to be deficient. Problems included failing to identify sources of funds, failing to investigation "adverse intelligence" about its clients and poor record keeping.

The watchdog said there was an unacceptable risk Coutts was handling the proceeds of crime.

Ms McDermott said: "This penalty should serve as a warning to other firms that, not only should they ensure they constantly review and adapt their controls to changing financial crime risks within their businesses, but that they must also make changes to reflect changing regulatory or other legal standards."

The censure comes after the FSA started a thematic review of banks' compliance with anti-money laundering regulations in 2010. Five banks including Coutts were referred for enforcement.

The fine of £8.75m was reduced by 30pc as a result of Coutts agreeing to co-operate at an early stage

In a statement, Coutts said it had been working with the regulator to correct the problems.

Rory Tapner, chief executive of the wealth division of Royal Bank of Scotland, said: "We are disappointed that Coutts & Co did not meet the FSA's standards with regard to establishing and maintaining effective anti-money laundering controls in relation to high risk clients.

"Since the FSA first raised its concerns, we have implemented a number of improvements to prevent any recurrence of these failings."